The ASB published on 23 November 2004 an Exposure Draft of an amendment to the Financial Reporting Standard for Smaller Entities (FRSSE). The Exposure Draft is based on the 'one-stop shop' proposals set out in the March 2004 Discussion Paper, which was widely welcomed by respondents, to reflect the accounting requirements of company law. It also ensures that the FRSSE will be kept up-to-date with existing accounting standards.

The recent changes to the 1985 Companies Act affecting small companies' accounts that come into force from 1 January 2005 have been reflected in the Exposure Draft and this has been a driver for proposing an effective date of accounting periods beginning 1 January 2005. These changes include the requirement to show some preference shares as liabilities in the balance sheet rather than as part of share capital and reserves.

For small companies outside of Great Britain the Exposure Draft gives detailed corresponding references to the legal requirements in Northern Ireland and the Republic of Ireland. The accounting requirements derived from the law are distinguished from those derived from accounting pronouncements to assist entities using the FRSSE that are not bound by companies legislation. In incorporating the legal requirements some restrictions are proposed to the accounting options available under the law. These include:

• Alternative accounting treatments such as the valuation of stock at current costs and the revaluation of intangible fixed assets will not be reflected in the updated FRSSE which is consistent with the accounting requirements of the current FRSSE.
  
  
• The recently introduced option to fair value financial instruments and other assets will not be incorporated into the FRSSE at this stage.
  
  
• Two of the four formats for the profit and loss account will be available in the FRSSE. However, both formats for the balance sheet are permitted although only Format 1 is shown in full in the Exposure Draft.
  
  
• The FRSSE will no longer cover the preparation of consolidated financial statements.

In developing the Exposure Draft, the ASB, assisted by its Committee on Accounting for Smaller Entities, considered all the accounting standards and UITF Abstracts issued, or amended, between October 2004 and June 2001 when the last Exposure Draft of amendments to the FRSSE was published. The proposals to amend the FRSSE are as follows:

• The basic principles of FRS 5 Application Note G 'Revenue recognition' will be incorporated into a new section of the FRSSE on revenue recognition together with specific guidance on 'bill and hold arrangements' and 'sales with rights of return'.
  
  
• The text on post balance sheet events will be updated to reflect that used in FRS 21 'Events after the balance sheet date'. The requirements are essentially the same as the superseded SSAP 17 except that dividends declared after the balance sheet date no longer meet the definition of a liability and should not be recognised in the profit and loss account.
  
  
• Of recent UITF Abstracts, only UITF 34 'Pre-contract costs' will be reflected in the FRSSE. It deals with the costs incurred in bidding for and securing contracts to supply goods or services. These are increasingly common transactions in the economy as a whole and sufficiently relevant to smaller entities to justify inclusion of guidance in the FRSSE.

The Exposure Draft proposes, for the time being, not to incorporate any requirements from FRS 20 'Share-based payment' which requires an entity to recognise share-based payment transactions (including those with employees or other parties) and the associated assets, liabilities and expenses.

Comments on the Exposure Draft are invited by 22 February 2005.